Question

Suppose that the money demand function takes the following form:

[ ? ? ] ? = ?(?, ?) = ? /5?

a. What is the velocity of money in this economy? Show your work.

b. If expected inflation and nominal interest rates are constant, at what rate, if any, will velocity grow? Explain your answer.

c. How will a permanent (once-and-for-all) increase in the level of the nominal interest rate affect the level of velocity? How will it affect the subsequent growth rate of velocity?

d. Assume that the rate of growth of income is 3%. What should the Fed’s money supply growth rate equal if it wants to target the inflation rate at 2%?

Answer 1

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